“An Investor’s Guide to Riding the Growing Build to Rent Wave in Texas” is a guest blog from 14th Street Capital.
The Build to Rent industry is the center of attention in the US real estate community. The media is becoming buzzier, and things are just getting started. What main forces are at work in the Build to Rent market, and why is it such a tempting investment? Here, we’ll look at the solutions and examine how people might access and assess investment options in Texas.
Why Build to Rent is growing in Texas
Hunter Housing Economics estimates that in the following 18 months, investors will pour almost $40 billion (paywall) into Build to Rent construction.
Texas has several distinct real estate benefits, including the ability to construct brand-new, cash-flowing multifamily homes and rental properties at reasonable prices. In many states, it isn’t financially feasible to construct brand-new residences for rental purposes. However, Texas’s unique turnkey Build to Rent program offers good cash flow.
According to a recent analysis, Austin, Texas, had 1,390 single-family rental homes in Build to Rent neighborhoods as of 2021, ranking it 13th nationally in that category.
With roughly 90,000 conventional single houses in Build to Rent neighborhoods and an occupancy rate of 97%, rental properties are becoming more attractive than apartments. Multifamily rentals are at 95%. Austin has 760 Build to Rent homes in the city.
What are Build to Rent houses?
Designed expressly to be rented, single-family homes are known as “Build to Rent” (BTR) dwellings. These residences are part of well-organized communities that are managed, leased, and maintained on site. Many BTR communities are found in places with outstanding school systems and close proximity to business centers. They typically range in size from 50 to 200 homes.
Many BTR residences frequently provide more room and facilities than standard apartment buildings. Private walled patios or individual backyards; health or business centers; and other outside amenities like grilling stations, play spaces, or dog parks are all available to residents.
BTR neighborhoods are designed to cater to particular target demographics, such as older millennials looking for space to accommodate their expanding families or seniors wishing to downsize.
Investor’s guide to riding the growing Build to Rent wave
1. Select the right place
Like every home project, location is crucial. Additionally, the target market is essential because BTR is a housing solution that’s driven by services. BTR can provide homes in nearby areas that would be out of reach for commuters otherwise, but the location must be suitable to support the density and maintain the community.
Developers have been able to access high-value land in metropolitan locations that would have been difficult for for-sale developers to do because of the financial muscle behind BTR.
Additionally, BTR functions well in partnership with organizations from the public sector, like Transport for London. In contrast to for-sale homes, if a public entity can free up land for BTR development, they can anticipate a long-term return from the development.
2. Maximizing profit by catering to “renter psychology.”
BTR builders should know the difference between what a buyer wants and is willing to pay for, and what a renter wants and is willing to pay for, in addition to providing excellent, useful facilities.
There is a disparity in requirements. Examples of amenities that BTR tenants are willing to pay for include a community gym, a dog park, and more bedrooms, but not increased energy efficiency or upscale fixtures and fittings. The best way to maximize your return on investment (ROI) in a BTR environment is to identify and capitalize on those ROI generators.
3. Make smart financing decisions
Financing is an important aspect of a profitable real estate investment, and BTR properties are no exception. If you already have some funding for the development work but need quick cash for the site acquisition, a hard money loan can be a good option in Texas.
Another short-term option is bridging finance, which requires an exit plan—in this case, refinancing the loan onto a BTR loan.
Hard money lenders bypass the stringent requirements of conventional lenders such as banks and make it easier to get access to the funding for purchasing and building the rental units. Whether the project needs construction, bridge, or permanent funding, there are many reputed hard money lenders in Texas who can finance it at any stage of the project.
4. Pay more attention to your civil preparations
Construction delays, increased costs, and the possibility of alienating your trade base are all possible outcomes of horizontal conflicts during BTR construction.
Sites with BTRs are typically denser than single-family neighborhoods. Ideally, developers would hire a general contractor who 3D models everything and spend more time evaluating the civil designs and how they intersect with the vertical side of construction.
5. To increase pre-leasing interest, phase construction as planned
Building time for BTR projects is short, which might make keeping up with the rapid pace of vertical starts difficult. Increasing revenues through early occupancies and providing amenities ahead of time to assist leasing efforts are just two examples of why the construction phase is more crucial than ever.
6. Determine the proper quantities
For a scheme to be profitable for BTR, around 200 units are required—many operators and investors appear to aim for 250.
Except for a few outliers that are planned with light-touch amenity packages, smaller systems are not ideal since they can’t support the operational cost. A scheme needs 500+ units to provide all the BTR bells and whistles.
7. Combine it
Along with retail space or other commercial purposes, BTR can be used with several other tenure mixes. With co-working and co-living forming outward-looking groups, it might be a part of the “co” revolution. It can also function as a stand-alone development.
The community shouldn’t be a walled community. Instead, it should engage with the outside world while preserving the residents’ essential right to privacy.
8. Add a little back of house
If the operator wants to provide good service, back-of-house amenities are equally as crucial as those at the front of house. These need the appropriate number of delivery storage units, trash chutes, loading bays for walk-through lifts, and moving in/moving out days because they happen more frequently than in a typical market selling plan.
9. Execute in a single batch
Plan your project in one phase. BTR absorbs capital significantly more quickly than market-rate housing. This is essential to get the community going inside the development, as well as fantastic for place-making and launching a larger regeneration.
To encourage social interaction and ensure that all inhabitants have equal access to amenities, placemaking in a single phase should center on a single core. Residents should feel like they are renting the entire building, not just their flat, thanks to the architecture.
The internal arrangements, such as having a sizable center space for residents and the larger community, must be extremely operationally efficient.
BTR is especially well adapted for contemporary construction techniques like volumetric modular. This provides several advantages, including quicker construction times so that investors can start generating rental income sooner; a better finish that lowers upkeep and maintenance costs; and a more environmentally friendly, less carbon-intensive building process.
10. Include features that appeal to your target
Change some of the amenity space use from private to communal. The core shared amenities (letter delivery, lounge area, rear of house for storage, loading bay for move in and move out, refuse collection facilities) and supplemental amenities that reflect the brand should be present in every BTR property. As building utilization data are produced and analyzed, these can be updated as needed.
Since BTR buildings are often owned and run by institutions, they must function as an asset for both the investors and the residents. This requires that amenities like gyms and swimming pools undergo ongoing evaluations of both their value to the community and their operating expenses.
A BTR development must actively promote a feeling of community because doing so results in higher retention rates, which is good for the development’s financial performance. People who enjoy their neighborhood and their neighbors tend to stay put.
Is it worth it to invest in a BTR community?
Here are some of the reasons you should invest in a BTR community if you’re thinking about doing so.
A reliable source of side income
While being a landlord necessitates being hands-on, becoming a BTR investor does not. Since a seasoned management firm will handle it, managing your rental operations won’t require much of your time. BTR investments are a fantastic way to invest in the rental market and get passive income from it.
Fewer tenancy changes
Serving long-term tenants is the main goal of building communities for rent. Tenants of BTR homes don’t have to worry about looking for and moving into another home for several years, unlike tenants of regular apartments and lots. People feel more confident renting BTR houses because of this, which reduces tenant churn.
A sound financial bet
Investing in BTR properties is generally a safe bet because the market is already established and reputable. Despite the fact that all forms of investment are essentially a chance, the BTR model is a tried-and-true strategy with lower risks. But before you choose anything, you must do a complete market analysis.
For landlords and real estate investors, BTR homes are a desirable alternative. While providing a high standard of living for the renters, they also present investors with potentially more lucrative and secure investment prospects.
BTR homes are the best option for people who want to live in a community and for long periods of time. Real estate investors can easily collaborate with developers to ensure a source of passive income. To decide whether to invest in BTR homes, you can simply review the advantages and disadvantages we outlined above.
This article is for informational purposes only and does not constitute legal or financial advice. Please consult with your attorney and/or financial planner for legal and financial advice.
No One Knows Build to Rent Better Than 2-10 HBW
Navigating the 2023 Housing Market Shift